University of Miami & The Ponzi Scheme

Florida Universities are facing financial troubles these days. While most schools are dealing with budget cuts, The University of Miami has recently been involved in a Ponzi (pyramid) scheme. While the university was not officially part of the scheme, university facilities were utilized.

Andres Pimstein, who graduated from the university, confessed to operating the scheme which has, at last estimate, lost $30 million. Apparently investors were promised an amazing 18% return on their investments. Anyone reasonably familiar with investing should have been suspicious of such high returns.

A wide range of people were caught up in the scheme, including Victor Gonzalez. He invested $3.5 million for the promise of an 18% return. Instead, it seems likely that he will instead lose $2 million. In response, he said: “I want to believe people. I can’t believe somebody would go to so much trouble to try to take advantage of you.”

His quite raises two interesting points. First, as he notes, people generally want to trust other people. Our social and economic actions are based (in part) on trust. Without such trust, society would hardly be possible and economics would mostly be a matter of direct barter (presumably with weapons on hand). Of course, trust needs to be grounded in reason. While most people are honest, there are enough dishonest people that it is wise to be on guard. Ironically, the reason why I believe that most people are still honest is that deception is still effective. As Kant argued, if deception became the law of the land, it would be self defeating. Naturally, factors such as gullibility and greed need to be taken into account, but honesty still seems to be the general option for the majority.

Second, he expresses disbelief at the efforts to which someone will go in order to deceive. While it would be nice to believe in the general goodness (or laziness perhaps) of people, history is replete with examples of how far people will go to deceive. True, some people are lazy in their deceptions, but others have been quite ambitious in their deceit. Governments, for example, are among the most industrious deceivers. Also, there are various schemes that are so well known that they have special names (such as the Ponzi scheme). Of course, anyone familiar with Sir Walter Scott would know about the tangled webs woven when one sets out to deceive.

The lesson of this situation is an old one: do not easily trust what seems far too good to be true.